News shocks and asset price volatility in general equilibrium

We study equity price volatility in general equilibrium with news shocks about future productivity and monetary policy. As West (1988) shows, in a partial equilibrium present discounted value model, news about the future cash flow reduces asset price volatility. We show that introducing news shocks in a canonical dynamic stochastic general equilibrium model may not reduce asset price volatility under plausible parameter assumptions. This is because, in general equilibrium, the asset cash flow itself may be affected by the introduction of news shocks. In addition, we show that neglecting to account for policy news shocks (e.g., policy announcements) can potentially bias empirical estimates of the impact of monetary policy shocks on asset prices.     

News,disaster risk,and time-varying uncertainty

Standard real business cycle models are often unable to replicate three empirical facts: positive output in response to good news, stochastic volatility of macro variables, and asymmetric business cycles. This paper proposes a unified basis for understanding these facts in a tractable dynamic stochastic general equilibrium (DSGE) model, in which the key is the interaction of information flows and disaster risk. Information flows fluctuate between two regimes with different precision levels for signals regarding future economic fundamentals. A shift in forecast precision changes the probability of entering an economic disaster. High disaster risk leads to low expected capital returns and a decline in hours, investment, and output. Changing information structures results in different volatility and skewness over the business cycle. Simple theory makes the two expectation effects through information flows and disaster risk transparent. Quantitatively, the model suggests that the interaction of the two expectation effects plays a significant role in accounting for the higher-order moments of the business cycle.     

Asset market response to monetary policy news from SNB press releases

This paper analyses the effects of Swiss National Bank (SNB) communication on asset prices. It distinguishes between different monetary policy news contained in press releases following a monetary policy decision. Employing a latent variable approach and event-study methods, I find that medium- and long-term bond yields respond to changes in the communicated inflation and GDP forecasts as well as to the degree of pessimism expressed in press releases. Exchange rates mainly react to changes in the GDP forecast while stocks do not react to SNB communication on monetary policy announcement days. Additionally, short-term expectations about the future path of the policy rate are driven by the communicated inflation forecast. The results underline the role of qualitative news beyond quantitative forecasts in influencing market expectations and asset prices.     

Causality and volatility patterns between gold prices and exchange rates

This paper provides a new perspective on the link between gold prices and exchange rates. Based on gold prices denominated in five different currencies and the related bilateral exchange rates, we put causalities and short-run volatility transmission under closer scrutiny. We provide evidence that the identification of a strong hedge function of gold requires an explicit modeling of the volatility component. For all currencies, exchange rate depreciations initially have a negative impact on the gold price after one day which turns out to be positive after two days in most of the cases. Contrary to previous studies, our results point to a specific role of the dollar in the context of gold-exchange rate relationships: volatility of dollar exchange rates more frequently results in strong hedging functions of gold prices. Furthermore, the gold price denominated in the US dollar tends to increase after a depreciation of the dollar.     

Structural analysis of portfolio risk using beta impulse response functions

We estimate the data generating process of daily excess returns of 20 major German stocks in a CAPM framework with time varying betas. Our sample spans a 23 year period from 1974 to 1996. An asymmetric dependence of volatility on lagged innovations is taken into account. We introduce beta impulse response functions to shed light on the structural implications of systematic risk associated with competing volatility models. The dependence of beta on news is characterized with respect to different sources (asset specific vs. market general news). The empirical results suggest that negative news emerging from the market involve a stronger impact on beta relative to positive news. Concerning firm specific news the opposite relation is found for the majority of the analysed data sets.     

Media Content,Accounting Quality,and Liquidity Volatility

We examine how the linguistic content of news items affects the volatility of a firm's liquidity, and we consider whether accounting quality moderates the media content-liquidity volatility relation. Regarding the unconditional relation between media content and liquidity volatility, one view is media content could reduce liquidity volatility by providing additional information about fundamental values; another view is it could increase liquidity volatility by increasing investor uncertainty, particularly for negative news. Using data from Thomson Reuters News Analytics, we find evidence supporting the view that media content, positive and negative, has incremental information. Regarding the moderating role of accounting quality, pre-existing accounting information of higher quality could enhance investors' reactions to media content by providing a more precise baseline, or it could reduce investors' reactions to the news if investors anchor on higher quality financial statements. Our findings are consistent with more credible accounting information serving an anchor role, and suggest that investors condition their reaction to media content based on the quality of a firm's pre-existing accounting information.     

How does news sentiment impact asset volatility? Evidence from long memory and regime-switching approaches

This paper examines the dynamic relationship between firm-level return volatility and public news sentiment. By using the new RavenPack News Analytics ⿿ Dow Jones Edition database that captures over 1200 types of firm-specific and macroeconomic news releases and their sentiment scores at high frequencies, we investigate the circumstances in which public news sentiment is related to the intraday volatility of the constituent stocks in the Dow Jones Composite Average (DJN 65). Two different conditionally heteroskedastic models are employed: the Fractionally Integrated Generalized Autoregressive Conditionally Heteroskedastic (FIGARCH) and the two-state Markov Regime-Switching GARCH (RS-GARCH) models. For most of the DJN 65 stocks, our results confirm the significant impact of firm-specific news sentiment on intraday volatility persistence, even after controlling for the potential effects of macroeconomic news. Compared with macroeconomic news sentiment, firm-specific news sentiment apparently accounts for a greater proportion of overall volatility persistence. Moreover, negative news has a greater impact on volatility than positive news. Furthermore, the results from the RS-GARCH model indicate that news sentiment accounts for a greater proportion of volatility persistence in the high-volatility regime (turbulent state) than in the low-volatility regime (calm state). In-sample forecasting performance and residual diagnostic tests suggest that FIGARCH generally outperforms RS-GARCH.     

Swiss National Bank communication and investors’ uncertainty

This paper analyzes the effects of Swiss National Bank communication on stock investors’ uncertainty. Monetary policy news is identified via changes in short- and medium-term futures prices as well as by applying methods from computational linguistics and dictionary approaches to policy statements. Surprises in policy rate changes and regarding the future path of the policy rate exhibit an asymmetric effect on stock investors’ uncertainty. Moreover, by taking into account various topics addressed in the statements, I show that investors’ uncertainty decreases due to an optimistic tone in communications about economic growth. Increased uncertainty expressed in policy statements translate into increasing stock investors’ uncertainty. The results explain how news contained in monetary policy statements reduce noise in financial markets and therefore contribute to financial stability.     

Press freedom and jumps in stock prices

Press freedom varies substantially across countries. In a free environment, any news immediately becomes public knowledge through mediums including various electronic media and published materials. However, in an unfree environment, (economic) agents would have more discretionary powers to disclose good news immediately, while hiding bad news or releasing bad news slowly. We argue that this discretion affects stock prices and that stock markets in countries with a free press should be better processors of economic information. Using an equilibrium asset-pricing model in an economy under jump diffusion, we decompose the moments of the returns of international stock markets into a diffusive risk and a jump risk part. Using stock market data for a balanced panel of 50 countries, our results suggest that in countries with a free press, the better processing of bad news leads to more frequent negative jumps in stock prices. As a result, stock markets in those countries are characterized by higher volatility, driven by higher jump risk and more negative return asymmetry. The results are robust to the inclusion of various controls for governance and other country- or market-specific characteristics. We interpret these as good stock market characteristics because a free press improves welfare and increases economic growth.     

Explaining movements in UK stock prices

We examine movements in aggregate UK stock prices by decomposing the variance of unexpected real stock returns into components due to revisions in expectations of future dividends, discount rates, and the covariance between the two. The contribution of news about future discount rates is about four times that of news about future dividends, with no significant covariance between them. Our analysis of excess returns uncovers a positive covariance between news about dividends and news about real interest rates. Since these two elements have opposite effects on current stock prices, their combined effect is negligible. Persistence in expected returns, as well as predictability, are found to be important in explaining stock price movements.     

Monetary policy and stock prices in small open economies: Empirical evidence for the new EU member states

This study presents evidence on the effect of domestic and Euro Area monetary policy on stock prices in four new EU member states of Central Europe and the main determinants of stock price volatility, estimating structural vector autoregressive models identified with short-run restrictions. We find that stock prices in the considered new EU member states are more sensitive to changes in the Euro Area interest rate than to the domestic one. Moreover, the bulk of stock price volatility in these countries is due to shocks related to exchange rate and Euro Area monetary policy. Overall, we find that local stock markets are more sensitive to external shocks than to domestic ones.     

Monetary policy,asset prices and consumption in China

This paper studies the wealth channel in China. Although the wealth channel has been found to be functioning in many advanced countries, its existence is yet to be explored in most emerging economies, also in China. In order to illuminate dynamics between monetary policy, asset prices and consumption, we use the structural vector autoregression method. The findings support the view that a loosening of China's monetary policy does indeed lead to higher asset prices. Furthermore, a positive shock to residential prices increases household consumption, while the role of stock prices seems to be small from the households’ point of view. Finally, we test the existence of the wealth channel more formally to find out whether those changes in asset prices that are caused by monetary policy are significant enough to increase consumption. In summary, the wealth channel remains weak but there are some signs of it via residential prices. The results are not that different from those attained for the advanced economies, where the size of the wealth channel has been found to be limited.     

Economic policy uncertainty,oil price volatility and stock market returns: Evidence from a nonlinear model

This paper investigates the nonlinear relationship between economic policy uncertainty, oil price volatility and stock market returns for 25 countries by applying the panel smooth transition regression model. We find that oil price volatility has a negative effect on stock returns, and this effect increases with economic policy uncertainty. Furthermore, there is pronounced heterogeneity in responses. First, oil-exporting countries whose economies depend more on oil prices respond more strongly to oil price volatility than oil-importing countries. Second, stock returns of developing countries are more susceptible to oil price volatility than that of developed countries. Third, crisis plays a crucial role in the relation between oil price volatility and stock returns.     

Ex-post rational price approximations and the empirical reliability of the present-value relation

Excess volatility and regression tests have resulted in apparent rejections of the present-value relation when ex-post price approximations are employed. These approximations are based upon a sample terminal condition for prices, are not ergodic time-series, and do not result in statistics with readily calculable standard errors. Kleidon (1986a) has demonstrated that ex-post price approximations can subtly affect the reliability of certain volatility tests. We use a bootstrapped cointegration model to demonstrate some of these same effects in Mankiw, Romer and Shapiro's (1985) volatility statistics. The volatility statistics rarely have positive expected value in finite samples and still do not reject the presentvalue relation. Approximations based upon a ‘rolling’ terminal condition result in volatility statistics which have calculable large-sample errors, but even these standard errors greatly overstate the accuracy of volatility statisics in small samples. Regression tests of the present value relation are also affected by the price approximations.     

Price dynamics when there are alternatives to cash payment

Empirical evidence from the 1980s and 1990s indicates that cash use in the U.S. remains high even though there has been a proliferation of alternatives to cash. This paper examines the dynamics of inflation and asset prices in response to innovations in the efficiency of processing noncash transactions. The quantitative results suggest that inflation is more sensitive than nominal interest rates or real equity prices to innovations in the efficiency of non-cash payments processing. Thus, as alternatives to cash payment become more prominent, the volatility of real interest rates may increase.(JELE31, E41, G12) This research is supported by a Swarthmore College Faculty Research Grant and a Eugene M. Lang Faculty Fellowship.     

New insights into the role of global factors in BRICS stock markets: A quantile cointegration approach

Because of the acceleration in marketization and globalization, stock markets in the BRICS (Brazil, Russia, India, China, and South Africa) countries are affected by various global factors, for example, oil prices, gold prices, global stock market volatility, global economic policy uncertainty, financial stress, and investor sentiment. This paper offers new insights into the short- and long-run linkages between global factors and BRICS stock markets by applying the quantile autoregressive distributed lags (QARDL) approach. This novel methodology enables us to test short- and long-run linkages accounting for distributional asymmetry. That is, the nonlinear dynamic relationship between the global factors and BRICS stock prices depends on market conditions. Our empirical results show that the effects of gold prices and global stock market volatility on BRICS stock prices are more significant in the long run than in the short run. A decrease in global stock market volatility is associated with higher stock prices, while gold prices demonstrate upward co-movement in dynamic correlations with stock markets. Irrational factors, such as economic policy uncertainty, financial stress, and investor sentiment, play a critical role in the short term, and negative interdependence is dominant. Finally, the rolling-window estimation technique is used to examine time-varying patterns between major global factors and BRICS stock markets.     

The effects of foreign exchange and monetary policies in Russia

This paper examines the effects of Russian foreign exchange and monetary policies under conditions of abundant natural resources during the period 1999–2011 using structural VAR models. The results suggest that monetary policy shocks, which are identified as money supply disturbances, have a persistent effect on real output, and more than half of the volatility in real output can be explained by changes in the money supply. Furthermore, the analysis reveals that stock prices are a more significant transmission channel of monetary policy than bank loans.     

Monetary Policy and Asset Prices: A Markov‐Switching DSGE Approach

This paper estimates a Markov‐switching dynamic stochastic general equilibrium model by incorporating stock prices in monetary policy rules in order to identify the Federal Reserve's stance toward them. Based on the data from 1984:Q1 to 2009:Q2, I find that historical evidence of the policy reaction toward stock prices is weak except for the stock market bubble of the 1990s. A counterfactual exercise shows that the rapid growth in stock prices during that period would have been significantly higher if monetary policy had been independent of the stock market. However, unconditional macroeconomic volatility increases with the degree of policy responsiveness toward stock prices. Copyright © 2017 John Wiley & Sons, Ltd.     

Information flows and stock market volatility

This study examines how news is distributed across stocks. A model is developed that categorizes a stock's latent news into normal and nonnormal news, and allows both types of news to be filtered through to other stocks. This is achieved by formulating a model that jointly incorporates a multivariate lognormal‐Poisson jump process (for nonnormal news) and a multivariate GARCH process (for normal news), in addition to a news (or shock) transmission mechanism that allows the shocks from both processes to impact intertemporally on all stocks in the system. The relationship between news and the expected volatility surface is explored and a unique news impact surface is derived that depends on time, news magnitude, and news type. We find that the effect of nonnormal news on volatility expectations typically builds up before dissipating, with the news transmission mechanism effectively crowding‐out normal news and crowding‐in nonnormal news. Moreover, in contrast to the standard approach for measuring leverage effects using asymmetric generalized autoregressive conditional heteroskedasticity models, we find that leverage effects stem predominantly from nonnormal news. Finally, we find that the capacity to identify positively or negatively correlated stock returns is ambiguous in the short term, and depends heavily on the behavior of the nonnormal news component.     

Monetary policy shocks: We got news!

We assess the role of monetary policy news shocks in the context of a medium scale DSGE model estimated on US data. We estimate several versions of the model and find decisive evidence in favour of the inclusion of monetary policy news shocks over a two-quarter horizon. According to our results, monetary policy news shocks account for a non-negligible fraction of the variance of real variables, especially at shorter forecast horizons. Further, we document that the importance of monetary policy news shocks goes beyond what was observed in recent years. The historical importance of monetary policy news shocks dates back to the 1999–2006 period when the official FOMC statements provided information about both the current policy setting and the expected future policy path. We also show that adding monetary policy news shocks to the model does not lead to identification problems.